July 23, 2011

A Warm Wind At the Backs of Some, Generated Off the Backs of Others

Yesterday, I learned in this Mother Jones article that workers have increased their contribution to government revenue disproportionately since 1980. In other words, payroll tax (paid by workers) is a larger portion of government revenue than it used to be. That's a macroeconomic analysis, which still doesn't answer the question of whether rich people are being treated "unfairly" by the current tax system.

So to elaborate a little, let's take two people who make exactly the same amount: $100,000 in taxable income (after the standard deduction - let's not get complicated). "Worker Taxpayer" earns her money by working (getting compensation by way of a W2) and "Investor Taxpayer" earns her money from dividends in a $4 million stock portfolio she holds (its about 2.5% in yield - about right). Let's say they are both unmarried. Investor taxpayer does not work and has no compensation income. They are otherwise "equal," right? (except that investor taxpayer fits the description of those who vituperate about lazy welfare recipients who sit on the couch all day and watch TV, right?) I'll keep the rhetoric down, because the facts are outrageous enough to speak for themselves.

Worker taxpayer will pay $7650 in payroll tax, plus $21,617 in income tax (2011 brackets), for a total tax burden of $29,267.

Let's look at investor taxpayer. You would think they would be taxed at the same rate as worker, right? Wrong. Because investor taxpayer receives all of her income from qualified dividends, they get a "special" tax treatment. Bear with me, we're almost done. Generally, the maximum tax rate for qualified dividends is 15%, BUT HERE it is actually 0% because investor's other income (remember she doesn't work) is taxed at the 10% or 15% rate.

What this means is that rich people - who are incented by tax policy to remain on their couches (too much earned income would otherwise trip them into the 15% dividend tax bracket) - are now getting off their couches and going to tea-party rallies to maintain this unfair redistribution of wealth in their favor. For if they work, they risk having their dividends taxed at 15% (still half of what, say, worker taxpayer paid in taxes, but confiscatory in their view). Perverse incentive? Yup. Does it sound like the rhetoric of the right wingers about unemployed persons and welfare recipients laying on couches and not incented to work? Hm. . . .

Now let's say you didn't work, or you worked very little, and instead you made all of your income from qualified dividends. The "magic number" (the income threshold you need to stay under to avoid paying any tax on your dividend income) is $69,000 (married), $34,500 (single or married filing separately) or $46,250 (head of household). Thus, you can actually work a little, and you have all this extra time - to attend rallies, political functions, cook your food, clean your house or do other things that people who actually earn their income from working have to: (a) pay someone else to do (which is not deductible), (b) do in the evenings or on weekends, or (c) simply let it slide.

I will now illustrate how it is almost impossible for someone who is already rich to not get richer, in fact much richer. Both working taxpayer and investor taxpayer have identical lifestyles and thus spend the exact same amount of money (not likely, given that worker has to pay for commuting expenses - again NOT deductible). Let's assume that's $70,000 per year. We know that worker taxpayer already paid $30K in tax, so let's see what they have left to save: uh, nothing. Investor taxpayer paid no tax, so what do they have left over to save: $30K. Exactly the same amount that worker taxpayer paid in taxes.

The rationale for the tax policy you see illustrated above is George W. Bush's. In 2003 he said that "double taxation is bad for our economy and falls especially hard on retired people." He also argued that while "it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits."

Its odd to me that the above disparate treatment of otherwise similarly-situated earners is defended on the basis of "fairness." Is this 1984? And I also wonder whether there is a joke in there somewhere - i.e., given that a zero-percent tax bracket would apply to someone who made all of their money from dividends and capital gains, why wouldn't they retire? I sure as hell would. Working too much would bump all of their dividend income into the 15% tax bracket. Volunteering for the tea-party rally, or perhaps some other Republican cause, would be a far better use of one's time.